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This publication is available at https://www.gov.uk/government/publications/charities-detailed-guidance-notes/chapter-7-audits-by-hmrc-charities
Chapter 7.1: Introduction
7.1.1 HM Revenue and Customs (HMRC) selects a number of charities and community amateur sports clubs (CASCs) for audit to ensure that the Gift Aid Scheme is being used properly and that any repayment claims made are accurate. If your repayment claim is selected for a review, it doesn’t necessarily mean that HMRC believes the claim is wrong or that there’s suspicion about anything to do with the claim or your charity or CASC.
HMRC wants to help you to get things right and will help your charity or CASC to make further repayment claims if it is found that less tax has been claimed than was due.
7.1.2 HMRC auditors aren’t evaluated on the level of adjustments made or rewarded for the amount of tax they recover.
7.1.3 Charity trustees are ultimately responsible for ensuring that all claims are correct so they have an obligation to ensure that appropriate systems are in place to achieve that result. It’s also important that they’re aware of any review being undertaken by HMRC, and if it isn’t necessary for them to deal with the auditor directly they, should nominate a suitable charity official to do so in writing.
7.1.4 Chapter 3 of the Detailed Guidance Notes for Charities explains the requirements of the Gift Aid Scheme and the records you should keep and how long you need to keep them.
Chapter 7.2: How a charity is chosen for audit
7.2.1 Claims for audit are generally selected for review on a ‘risk’ basis which takes into account a wide range of factors. HMRC also select a number of claims for review on a random basis.
7.2.2 If your charity’s repayment claim is selected for a review, it doesn’t necessarily mean that HMRC believes the claim is wrong or that they’re suspicious about anything to do with the claim or your charity.
Chapter 7.3: What happens when a charity is selected for audit
7.3.1 HMRC will issue you with a questionnaire to help the auditor to get a better understanding of the relevant issues and the areas that’ll need to be covered during the review.
7.3.2 The main part of any audit is a detailed review of the documentation associated with a claim, including Gift Aid declarations and banking records. You’ll be advised in advance about:
- the records the auditor will need to see during the review
- whether the auditor intends to review all of the records supporting a claim or a sample of those records
The auditor may request sight of the Gift Aid declarations and audit trails for a number of donors included in your repayment claim along with the issue of the questionnaire. The auditor will then decide whether the review can be undertaken by correspondence, or whether a visit is required. If you’re asked to send your records to HMRC but would prefer our auditor to visit please let them know.
7.3.3 If a visit is required, a member of the audit team will contact you, giving as much notice as they reasonably can, to arrange a convenient date and venue for the audit.
7.3.4 If the proposed review date isn’t convenient or if you have any problems providing the records requested, you should discuss this with the auditor as soon as possible.
7.3.5 The auditor will work with you to help resolve any difficulties and to schedule appropriate dates for the review.
7.3.6 Where a charity can show that it has embarked on a programme to identify donors for whom Gift Aid declarations are missing or not appropriate (and to obtain declarations from them) this work may be continued to an agreed deadline and the auditor will take this into account when considering whether a full review is necessary.
7.3.7 Normally, the auditor will visit the place where the charity’s records are kept. When confirming arrangements for a review visit, please ensure the auditor knows where your records are kept. If any of your records are stored elsewhere or held by a third party, please tell the auditor and agree on arrangements for those records to be made available. If your records are kept on a computer, it may be necessary to allow the auditor to access hard copies of the records, which may determine where the review will take place.
Chapter 7.4: What the audit review involves
7.4.1 HMRC auditors will check records supporting a tax repayment claim including donation records, Gift Aid declarations and banking/cash records.
The auditors will generally base every review as follows:
If the charity is a trust for tax purposes, the auditors will review claims submitted that cover the last full tax year, that is, claims submitted in respect of donations received between 6 April and 5 April.
If the charity is a company for tax purposes, the auditors will review claims submitted that cover the year up to the last Accounts Period Ended (APE), for example, a charity has an APE of 30 September - claims will therefore be reviewed in respect of donations received between 1 October and 30 September.
Where there’s a specific reason for reviewing earlier claims the review may extend beyond the periods referred to above.
7.4.2 The audit will involve reviewing the charity’s accounting records, systems and procedures.
7.4.3 During the course of this work HMRC may also identify other potential tax risks, such as non-charitable expenditure, employer compliance and VAT issues.
7.4.4 Where potential problems are identified, the auditor may:
- advise the charity on accounting improvements that should be made
- take action to recover tax that HMRC considers to have been incorrectly repaid
- arrange a further payment by way of a further claim where the charity has claimed less than was due
- refuse to authorise payment of a proposed claim that HMRC consider to be incorrect
- refer matters for further consideration to other HMRC departments
- provide any advice necessary to help reduce the burden of record keeping for the charity
Chapter 7.5: What the auditor will be looking for
7.5.1 Essentially, the auditor will need to be satisfied that the charity’s records properly support the tax repayment claims.
7.5.2 The auditor will make checks such as ensuring that tax repayment forms (R68i) have been properly completed from the charity’s records.
7.5.3 The auditor will seek to confirm the validity of Gift Aid claims by ensuring that:
- appropriate Gift Aid declarations are held for all donations on which a Gift Aid tax repayment is claimed
- donations meet the requirements of the relevant legislation - for example that gifts aren’t subject to a condition as to repayment
- any benefits provided for Gift Aid donors do not exceed statutory limits
7.5.4 The auditor will need to see that an acceptable audit trail exists to link tax repayment claims to individuals, their donations and to their Gift Aid declarations.
7.5.5 The auditor will also need to see that an acceptable audit trail exists to show that the repayment under review has been received by the charity and been correctly banked into the appropriate account.
Chapter 7.6: What constitutes an acceptable audit trail
7.6.1 Usually an acceptable audit trail is easily established for donations received by cheque, standing orders, direct debits, debit card or credit card.
Cheque payments should be detailed on the paying in slips when banked by the charity, or can be included on a banking breakdown sheet if there are numerous cheques.
Standing orders and direct debit payments can be fully reviewed directly from the charity’s bank statements.
Card payments can be traced through the verification and confirmation provided to the charity by the card issuer.
However, there can be difficulties in:
- linking a particular cash donation to an individual who has given a valid Gift Aid declaration
- tracking that donation from the time it is made to the time it is banked by the charity
7.6.2 A charity must therefore ensure it maintains suitable records when claiming Gift Aid on cash donations. This may include an envelope giving scheme (see paragraph 6.4), or the issuing of receipts for every cash donation received.
7.6.3 It is not acceptable for a pool of cash collected on an unattributable basis to be arbitrarily allocated to individuals for whom a Gift Aid declaration is held and claims made on that basis.
7.6.4 As an example, a tried and tested record system that meets HMRC requirements involves:
- an individual sealing a cash donation in an envelope with a pre-printed Gift Aid declaration on it and putting his/her name and the amount given on the outside
- the envelopes being opened in the presence of at least 2 charity officials with the amount contained in each being checked against the statement on the outside and attributed to the named individual
- a record being kept of the name and amount given by each donor for whom a valid Gift Aid declaration has been received
- the envelopes that incorporate the Gift Aid declarations for one off donations being retained for 4 years from the date that the donation is included in a charity repayment claim
- a record being kept of the total cash collected and how it’s banked
7.6.5 This isn’t the only system that will meet HMRC requirements but it illustrates what they’re looking for.
7.6.6 An envelope might, instead of a declaration, incorporate a reference that links the named donor to a declaration given earlier, covering all donations to the charity. In such circumstances, the charity is advised to keep a minimum of one month’s envelopes per tax year, covering a period of 4 years. For example, a church may decide to keep every general giving envelope received throughout the month of August. After a period of 4 years the church will have in place a total 4 months envelopes, all received during August for the preceding 4 years.
7.6.7 HMRC is happy to review and comment on any system you have in place or are thinking of introducing in your charity.
Chapter 7.7: Other ‘risks’ the auditor will be looking for
7.7.1 The auditor will consider whether there’s anything that would bring into question entitlement to exemptions from tax available to charities - such as pursuit of non-charitable activities or applying funds for non-charitable purposes.
7.7.2 The auditor may also check that donors, who have provided Gift Aid declarations, have in fact paid the relevant amount of tax to cover the Gift Aid claimed on their donations. This will involve taking the names and addresses of some of the donors included in claims so that their tax records can be checked.
7.7.3 Any problems identified by such a review will be a matter between the individual donor and HMRC. For reasons of taxpayer confidentiality, HMRC won’t be able to identify the particular donors concerned to the charity. It will be up to the donors whether or not they wish to discuss such matters with the charity.
7.7.4 If HMRC find an unacceptable proportion of Gift Aid donors can’t be traced this may suggest poor record keeping by a charity, inadequate communication with donors or, exceptionally, fraud - these issues would be discussed further with the trustees of the charity.
7.7.5 In the course of their work, the auditor may sometimes come across evidence that a charity is failing to fulfill responsibilities with regard to other tax obligations (for example, in the operation of PAYE or VAT). Any such issues will be brought to the attention of the trustees and may be followed up by other HMRC offices.
Chapter 7.8: Statistical sampling
7.8.1 Where the number of documents supporting a repayment claim is too large to review in total within a reasonable period of time, HMRC will use statistical sampling techniques to consider the overall accuracy of the claim. This will help to ensure that the time spent carrying out the audit is acceptable and cost effective for both the charity and for HMRC.
7.8.2 These techniques involve:
- identifying all relevant ‘populations’ of income sources for example, sponsored events, membership subscriptions, one off donations within the tax claim being reviewed
- taking a representative sample of relevant records from each population - the number of records sampled will depend on the size of the population and is fixed by a standard statistical formula
- reviewing the sample records and establishing the extent of any errors
- calculating the error rate for the sample (that is, the proportion of the amount claimed for which supporting records were not provided or weren’t acceptable)
- for example - a sample of 475 Gift Aid declarations is selected for review - upon review, 20 declarations were found to be missing or not acceptable - the potential error rate is: 20/475 x 100 = 4.2%
- applying the error rate for the sample to the relevant population as a whole and using it to compute an estimate of the tax repaid with respect to that population that can’t be substantiated for the year of review
7.8.3 If you’re uncertain about any aspect of this procedure, please ask to discuss it with your auditor before the review.
Chapter 7.9: Sampling populations
7.9.1 Usually, all the donations included in a single claim will constitute a single ‘population’.
7.9.2 Where donations are processed in significantly different ways, there may be a case for treating them as distinct populations. For example:
- donors giving more than a particular amount may be treated in a different way
- donations relating to a particular sponsored event may be handled differently
- different branches of a charity may have different record keeping procedures
- some donations may be handled by a third party using different processes
7.9.3 Where some donations are processed in significantly different ways, you should advise the auditor before the review visit.
7.9.4 It’s possible that the review itself may reveal unexpectedly significant variations in the treatment of different groups of donations. In such circumstances, another review may be necessary. The auditor will discuss this with the trustees and/or senior management for a larger charity.
Chapter 7.10: Application of results to earlier periods
7.10.1 If HMRC identify errors in relation to a particular donor population, they will assume that the same error rate is likely to apply to all similar claims for the same population.
7.10.2 If earlier claims were handled in a significantly different way to the one reviewed in the audit, please discuss this with the auditor - ideally before the review visit.
7.10.3 It may, for example, be the case that:
- records for earlier claims are maintained on paper instead of computer
- a member of staff identifiably responsible for flaws in the preparation of a particular claim was not
- involved in the preparation of other claims
7.10.4 HMRC may need to look at a claim (or part of it) separately if they agree that the sample used isn’t representative for that claim.
Chapter 7.11: When the audit is finished
7.11.1 On the day the audit ends, the auditor will talk to you about exactly what has been reviewed and the results of that review.
7.11.2 The same information will be included in a letter to the charity summarising the audit findings and what action the charity may need to consider.
7.11.3 If HMRC find that less tax has been claimed than was due, the auditor will help you to make a further repayment claim.
7.11.4 If HMRC can’t substantiate a tax repayment claim and, as a result, they have paid you too much, the auditor will:
- explain in detail what HMRC believe the problem is and the formal process they need to follow to recover the tax involved
- provide a summary of the amounts of tax recoverable for all relevant years
- provide a computation of interest due, up to a projected settlement date
- where appropriate, discuss the basis for any penalties HMRC believes are due and explain HMRC policy on mitigation of the maximum penalty payable
- offer to negotiate a settlement with the trustees by way of a suitably worded letter of offer, which when accepted by HMRC would constitute a binding agreement, or raise formal assessments/determinations to recover the tax identified as repayable to HMRC at the review
- discuss any payment difficulties (where appropriate, HMRC can agree an instalment programme but the effect of interest means that this is likely to increase the total amount payable)
Usually, HMRC won’t recover tax for more than 4 years prior to the year under review. However, there are circumstances when this period may be extended. If this is being considered, the auditor will provide a full explanation to the trustees.
7.11.5 In the majority of cases, concerns arising from an audit will be resolved by discussion and an appropriate settlement will be agreed with the trustees.
7.11.6 If it proves impossible to settle the matter in this way, HMRC will start formal recovery action.
7.11.7 Trustees will have the opportunity to appeal against any formal assessments/determinations HMRC make.
7.11.8 Any wider potential risks identified during the audit will be discussed with the charity trustees and/or senior management, who will be advised how matters will be taken forward either within HMRC Charities or by another HMRC office.
Chapter 7.12: Putting right problems identified by the auditors
7.12.1 The charity will have at least 30 days from the date of the letter summarising the audit findings to resolve any problems identified. This may involve the charity having to obtain new appropriate declarations from donors.
This 30 day period will also apply to charities where the auditor has undertaken a sample review. Charities and CASCs can repair errors identified in a population within an audit sample, and HMRC will extrapolate the repaired error rate across the population (rather than the error rate found in the first instance).
Repaired means that the charity finds the missing declaration, or obtains a new (or fully completed) declaration from the taxpayer.
7.12.2 Also, HMRC will operate a de minimis limit when looking at error rates and tax recovery. An error rate of four per cent or less, calculated after the charity has had opportunity to repair the sample, for charities that claim under £2,500.00 Gift Aid per tax year or APE, will mean that the charity is not penalised for errors in their Gift Aid claims.
The size of the error rate, and the amount of subsequent tax repayable to HMRC in respect of the year of review will affect how the auditor seeks to conclude the case.
The following parameters will be followed:
|Repaired error rate||Amount at stake||Action at Audit 1|
|Less than 4%||Less than £100||No recovery in year of audit or earlier years. No card issued.|
|Less than 4%||Less than £500||Recovery in year but not earlier years. No card issued.|
|Less than 4%||More than £500||Recovery in year but not earlier years. ‘Yellow’ card issued.|
|More than 4%||Less than £500||Recovery in year but not earlier years. ‘Yellow’ card issued.|
|More than 4%||More than £500||Recovery in year and earlier years|
‘Yellow Card’ warnings
7.12.3 Where either the amount or level of errors is small HMRC will also introduce an optional ‘yellow card’ warning system to apply to earlier years rather than make recoveries for those years (see table above). ‘Yellow cards’ will be accompanied by advice on remedial action as to how the charity/CASC should prevent errors in its record keeping in the future. This will support charities and CASCs in understanding Gift Aid and rectifying errors for future claims.
The issue of a ‘yellow card’ has to be agreed by both HMRC and the charity involved. HMRC commits to only recover the tax due in respect of the year of review while the charity commits to take any remedial action HMRC think necessary to improve their record keeping. If agreement can’t be reached, HMRC will recover tax for both in year and earlier years based on the identified error rate.
If agreement is reached, but the remedial action hasn’t been taken the next time HMRC examine the claims of the charity/CASC, they will go back and recover any earlier years that are still in date.
A further examination of the records following the issue of a ‘Yellow card’ will be discussed with the charity by the auditor at the conclusion of the original review. The period between the original review and the further examination (if required) will not usually be longer than 36 months, and may well be shorter depending on the circumstances.
7.12.4 Where errors have been identified and a settlement has been concluded on that basis, it may be possible for the charity to make new claims.
During an audit a charity may find that Gift Aid declarations are missing for some of the donations under review. The charity may review some or all of its records and identify donations for which no valid Gift Aid declaration is held. The charity may secure new declarations from donors to cover the donations in question and submit a new claim with respect to those donations.
7.12.5 Generally, a charity is able to claim a repayment of tax for four years prior to the current tax year. Such new claims are not restricted to the amount of the original estimate of the error.
7.12.6 Following an audit, a charity is not required to review declarations in respect of periods covered by claims that were the subject of the review - but the charity should make no further Gift Aid claims without first ensuring that a declaration is in place for each donor to be included in the claim.
7.12.7 Charities should ensure that any problems identified are properly addressed so that they don’t recur.
7.12.8 HMRC are happy to work with charities to improve systems for processing donations and maintaining records.